BMO declares Toronto housing bubble amid ‘dangerously’ hot prices

Toronto in a housing bubble, the time to act is now: BMO economist

After months, if not years of hand-wringing about Canada’s hot housing markets, BMO is calling it: Toronto’s housing market is in a bubble.

“Let’s drop the pretence. The Toronto housing market — and the many cities surrounding it — are in a housing bubble,” BMO Chief Economist Doug Porter wrote in a note to clients Tuesday.

Housing prices in Toronto and the surrounding area have become “dangerously detached” from economic fundamentals and are rising simply on the belief that prices will continue to soar higher, according to Porter.

“Prices in Greater Toronto are now up a fiery 22.6 per cent from a year ago, the fastest increase since the late 1980s—a period pretty much everyone can agree was a true bubble — and a cool 21 percentage points faster than inflation and/or wage growth,” he wrote.

Toronto and Hamilton racked up record annual home price increases of 20.9 per cent and 17.6 per cent in January, respectively, according to the Teranet-National Bank Composite House Price Index. It was the 12th straight monthly increase. “The market is far too hot for comfort,” wrote Porter.

Toronto real estate too expensive, buy 20 billion Timbits instead

The Toronto Real Estate Board reports that 5,800 homes were sold in the GTA in January at an average price of $770,745. That works out to more than $3.9 billion in total housing sales for Canada’s largest city. To put that in perspective BNN looked at what you could buy for that money.

The often-cited mantra that Toronto’s real estate market is being driven largely by a lack of supply is wearing thin, he argues. Housing starts in Toronto and Vancouver recently hit an all-time high of 70,000 units per year and overall Canadian starts are above demographic demand at 200,000 units in the past year, according to BMO.

Meanwhile, Toronto condo prices are posting double-digit gains despite plenty of supply, according to Porter. “No, the massive price gains are being driven first and foremost by sizzling hot demand, whether from ultra-low interest rates (negative in real terms), robust population growth, or non-resident investor demand,” he said.

BMO acknowledges that addressing the overheated market won’t be easy. While Toronto prices continue to soar, the Vancouver market is cooling, Calgary and Edmonton are stabilizing after being hit hard by the crash in oil prices and markets such as Winnipeg, Montreal and Halifax are “well-behaved,” Porter wrote.

“Beneath those calm headlines lies serious churning. Toronto and any city that is remotely within commuting distance are overheating, and perhaps dangerously so. And it’s that deep divergence which continues to confound and bedevil policymakers.“

Sky-high home prices in Toronto often leads to talk about a housing bubble. That narrative is spooking banks from doling out construction loans according to the city's chief planner, Jennifer Keesmaat. She says that's a factor in the city's low supply.